A proactive approach to GCC VAT implementation

A proactive approach to GCC VAT implementation

SME businesses are expected to grow further in the UAE due to Expo 2020 related opportunities.

A simple unified value added tax (VAT) system is now a virtual "reality'' in the UAE and GCC wide due to signing of the VAT framework agreement by all the GCC countries. This will have great impact on the region's economic ecosystem, fiscal reforms process, where in businesses and investors are looking at the country/region with great interest, promise and anticipation.

VAT is fixed at a low 5 per cent unified rate with some exemptions and zero rated goods and services in some cases. With such a low rate of tax, it may have a marginal impact on the inflation in the region, and on consumer spending since some essential food items, education, health sector, residential sector, etc, are expected to be either zero rated and or will fall in the ''exempted'' category.

VAT is ultimately borne by the end consumer with suppliers (i.e. businesses) acting as collection agents for the tax authorities resulting in additional compliance costs.

The GCC region, UAE in particular, has no indirect taxation (especially consumption based taxes), and possesses a very business-friendly environment, which makes it a very attractive place to do business for international SME businesses. However, when compared to high rates of VAT applied in other countries, a rate of 5 per cent tax is by far the lowest.

The huge tourist inflows into the UAE/GCC from all parts of the world may see a temporary hit on their spending unless there are clear provisions for VAT rebate or cash refunds for tourists at the airport.

Economic benefits VAT

Besides additional revenue generation, it will promote trade across borders within the GCC and with the outside world, thus favourably impacting business environment despite political challenges. This will help in continued infrastructure spending in social sectors like education, healthcare, housing, etc, and with an increase in employment opportunities.

SME businesses are expected to grow further in the UAE due to Expo 2020 related opportunities, which will help them expand operations despite additional VAT compliance costs, which will cushion the impact.

Business impact and implementation challenges

  • Formal law and its rules are not in place yet leading to continued uncertainty about its coverage, implications, and exemptions.
  • Businesses will most likely have around five months to understand, implement and comply with VAT legislation once it is released.
  • Most SMEs have not started preparing for being VAT ready and been waiting for the country specific VAT law and its rules to be published.
  • The minimum revenue threshold of $100,000 is now fixed for businesses who are now obliged to register under the new VAT framework.
  • Small businesses, traders, shops, restaurants, etc are not used to and do not implement and or even maintain proper books of accounts, or ERP software which poses a major compliance challenge to SME businesses and VAT authorities alike.
  • Additional one off costs on restructuring, new VAT-compliant accounting systems, initial compliance preparation, potential increase in head count to build expertise, cash flow, and on working capital. To reduce the above cost the company can opt for either complete out sourcing or co-sourcing may also be considered.
  • Re-look at company legal governance structures (e.g. Free zone and mainland operations) and contract review.
  • Transfer pricing implications and related party transactions.

What can be done in the interim i.e. managing the transition?

  • They should refer MOF's website for regular updates to gain knowledge and build on awareness on VAT.
  • Businesses must prepare proper books of accounts and financial statements.
  • Many preparatory steps for assessment of business impact can be initiated even before the VAT law is introduced since sufficient expertise and guidance is available to business advisors and businesses alike.
  • An implementation and transition plan must be drawn up with professional help.
  • Legislation will impact all key areas of business such as Contracts, Procurement, Logistics, Finance, Legal and commercial structures, IT, HR, etc, and it is in the interest of the businesses to be proactive, given that release of VAT laws and rules can be expected soon.
  • Fine tuning of any implementation changes can be done once the law and rules are published. This will limit any business disruption and in operations during transition.
  • All businesses will be given around three months before the start date ofJanuary 1, 2018, to start registering under the VAT system, which will thus require a lot of groundwork changes, organisational preparedness including training of staff.

Implications of non-compliance

If not planned timely and wisely, some of the important areas can be completely overlooked, thereby inviting losses for missed Input VAT credits, delay fines, penalties, litigation, etc and interrogation from tax authorities, which may also lead to disruption in the smooth running of the businesses. So, VAT implementation needs to be approached in a structured way in time by business owners, relook at their commercial strategy, understanding its full impact (B2B & B2C), which will thus lay down a sound foundation for a VAT compliant framework, which will also help in streamlining operations.

SMEs should thus be aware of the risks and costs associated with the VAT implementation on its business model, processes and systems and accordingly work on it in a smooth and planned manner.

Not preparing in advance is thus not a good strategy so "being proactive'' makes a lot of SME business sense.

The writer is the administrative board member of IBPC, honorary director of Institute of Directors, UAE Chapter and Partner - Crowe Horwath. Views expressed by him are his own and do not reflect the newspaper's policy.